The number of households with problem debt has increased by 700,000 (28%) since 2012, according to new TUC and UNISON-commissioned research.

The report, Britain in the Red, shows that in 2014 one in eight households (3.2 million) were over-indebted compared to one in 10 (2.5 million) in 2012.

The report shows that young people, the self-employed and low-income families have been the hardest hit by the rise in problem debt. Problem debt is defined as having to spend 25% or more of monthly gross income on unsecured debt repayments (credit card debts, loans and overdrafts) that are not mortgage or rent payments.

Britain in the Red also finds that half (1.6 million) of those with problem debt spend 40% of their gross income on debt repayments that are not housing costs. Lower-income households account for the great majority (1.1 million) of this number.

The report reveals in 2012 just 2% of 18-34 year-olds with any form of unsecured borrowing were over-indebted, but by 2014 this had risen to 10%. Credit card, personal and payday loans, overdrafts and store cards were the main factor behind the increase in problem debt not student loans.

In 2012, 6% of self-employed workers with credit commitments were in serious debt. But by 2014 this had nearly tripled to 17%.

In addition, the number of low-income families with problem debt shot up from 9% in 2012 to 16% in 2014.

People who took out pay day loans in 2014 spent, on average, 30% of their income repaying them – up from 12% in 2012. In 2014 households with store cards spent 21% of their income repaying them – up from 9% in 2012.

The TUC and UNISON say the report reveals how economic growth has failed to reduce the burden of debt repayments for many families and that wage stagnation has left an increasing proportion of households having to borrow more than they can afford to get through each month. They fear this burden will get worse if we see early rises in interest rates.

The Bank of England identified the consumer debt boom prior to 2007 as one of the causes of the financial crisis and subsequent recession, and has also suggested that household debt has held back the recovery since.

Although households overall borrowed less, and paid back more after the crisis, debt-to-income ratios have remained very high as a result of real wages falling between 2007 and 2014 – the longest fall in living standards since records began in the 1850s. The analysis also shows that despite this small fall in overall debt-to-income ratios the proportion of households with problem levels of unsecured debt repayments is rocketing.

TUC General Secretary Frances O’Grady said: “Rising household debt is not the sign of a healthy economy. People raiding their piggy banks and borrowing more than they can afford is what helped drive the last financial crash.

“The fact that more and more are getting into problem debt is particularly worrying given the prospect of interest rates going up.

“We need a wages-led recovery that works for everyone not another debt-fuelled bubble.”